About once a week, as I approach the lobby elevators at 401 N. Michigan, I’m delighted to see someone already in the elevator. Most likely this stranger isn’t going to offer me a piece of chocolate cake or be my future wife; to the contrary, this person is rampantly pushing the “close door” button as I approach. While some may deem this rude, I interpret it as a happy reminder that alpha is still waiting to be found.

Many worker-bees of 401 N. Michigan have figured out that, during business hours, the elevators run on timers. The doors close when the timer runs to zero and a floor has been selected. Perhaps the button-pusher example is more an issue of human need for control (or at least perception thereof). Whatever your opinion of why this behavior takes place, I maintain that most human action is incomprehensible, which may offer the most warming explanation as to why bad taste is ubiquitous. The more important point is that button-pushers exist in many forms, in many places, and at the same watering holes as alpha. Also important is the idea that button-pushing is a learned behavior. But this is not the same type of learning error as if someone has been taught that the color “blue” is what the rest of us call “orange.” Button-pushing is an expression of inappropriately drawn conclusions that are consolidated and then repeated as a heuristic. The idea that redundant human actions still exist is a strong corollary to suggest market inefficiency.

Is it reasonable to suggest that the Harvard and University of Chicago MBAs running big companies are susceptible to this kind of inefficiency? I believe business leaders make the same kind of errors as everyone else—the mistakes just sound more complicated. The recent economic crisis is a perfect example of miscalculation. Most firms were aware of the extreme event risk that began to materialize in 2007, but chose not to adjust. I suspect it feels unnatural to form a business plan around extreme events, especially when the risk/reward for doing so is out of balance. Combine that discomfort with performance goals focused on sequential rather than annual periods and eventually you trip from running too fast. The perception of risk control changed from a necessity to an expense item. A lot of firms that needed a lifeline in the last few years have closed their doors.

The mere existence of a business cycle is informative of human repetition. Why doesn’t the economy simply grow at 1%-3% per year with businesses entering and exiting markets at a more predictable pace? There are a lot of reasons why the business cycle graph looks like a wave instead of a straight line, but for every firm that went out of business in a downturn I assure you there was a surviving firm that either burrowed chestnuts for a long cold winter, changed direction and moved to Florida, or both.

The reality is that some things change and some things don’t. Holding all factors constant, people today still succumb to the old adage of acting the same, but expecting a different result. If anything, I would suspect that attention span and memory have worsened over time. On January 5, 2010, the front page headline of the Wall Street Journal read, “The Hidden Benefits of Exercise.” It appears that even mainstream publications have low expectations, restating the obvious as though it were new information.

In 2010 people are still mammals. Our abilities vary but our mistakes are of a similar nature. One thing that clearly differentiates us from primates is the ability to challenge inconsistencies, which is the reason I felt empowered to push the “close door” button when I came to the office on a Sunday—and guess what? It worked! As an analyst, it is my nature to evaluate what, if anything, has changed. In 2010 and beyond, I am quite certain that learning errors of the past will be repeated, albeit in a slightly different flavor. One constant in error, however, is alpha. Until the time comes when the world stays exactly the way it is, you’ll find me in the Wanger office elevators pushing buttons.

Lee Wolf, Securities Analyst,
Wanger Investment Management, Inc.